Market Structures Quiz: Test Your Economics Knowledge

Study Notes

Perfect Competition

A firm in a perfectly competitive market is a price-taker, meaning it has no control over the market price.
The short run equilibrium of a firm under perfect competition is achieved when the firm maximizes its profit by producing the level of output where marginal revenue equals marginal cost.
The profit maximization principle is achieved when the firm's marginal revenue equals its marginal cost.
In the long run, the firm will continue to produce as long as the average revenue is greater than or equal to the average cost.

Monopoly

A monopoly is a market structure in which a single firm supplies the entire market with a particular good or service.
The sources of monopoly power include:
- Government grated monopoly
- Ownership of a key resource
- Patents and copyrights
- High barriers to entry
The short run equilibrium of a firm under monopoly is achieved when the firm maximizes its profit by producing the level of output where marginal revenue equals marginal cost.
The long run equilibrium of a firm under monopoly is achieved when the firm's marginal revenue equals its marginal cost, and the firm has no incentive to change its price or output.

Monopolistic Competition

Monopolistic competition is a market structure in which many firms produce differentiated products that are close substitutes for each other.
The features of monopolistic competition include:
- Many firms and free entry
- Product differentiation
- Non-price competition
- Excess capacity
The short run equilibrium of a firm under monopolistic competition is achieved when the firm maximizes its profit by producing the level of output where marginal revenue equals marginal cost.
Excess capacity is a characteristic of monopolistic competition, where firms produce below their capacity to maintain prices and avoid competition.

Advertising

Advertising has both positive and negative impacts on the economy:
- Positive impacts: increased consumer awareness, increased competition, and economic growth
- Negative impacts: misleading information, waste of resources, and barriers to entry

Oligopoly

Oligopoly is a market structure in which only a few firms compete with each other.
The features of oligopoly include:
- Few firms and high barriers to entry
- Interdependent decision-making
- Non-price competition
Oligopoly markets can be either collusive or non-collusive:
- Collusive oligopoly: firms cooperate to maximize joint profits
- Non-collusive oligopoly: firms compete with each other

Capital Budgeting

Capital budgeting is the process of evaluating and selecting investment projects that are profitable for the firm.
The steps in capital budgeting include:
- Project identification
- Project evaluation
- Project selection
- Project implementation
The importance of capital budgeting lies in its ability to maximize the firm's value and profitability.

Pay Back Period Method

The Pay Back Period Method is a capital budgeting technique that evaluates projects based on the time it takes to recover the initial investment.
The advantages of the Pay Back Period Method include:
- Easy to understand and calculate
- Focus on liquidity
The disadvantages of the Pay Back Period Method include:
- Ignores the time value of money
- Does not consider the project's profitability

Net Present Value Method

The Net Present Value Method is a capital budgeting technique that evaluates projects based on their present value of future cash flows.
The Net Present Value Method is considered a superior technique because it:
- Considers the time value of money
- Evaluates the project's profitability

Internal Rate of Return Method

The Internal Rate of Return Method is a capital budgeting technique that evaluates projects based on the rate at which they generate returns.
The Internal Rate of Return Method is considered a superior technique because it:
- Considers the time value of money
- Evaluates the project's profitability

Description

Test your knowledge on various market structures in economics including perfectly competitive market, monopoly, and monopolistic competition. Learn about short run and long run equilibrium, profit maximization principle, and sources of monopoly power. Explore the positive and negative impacts of advertisement in economic markets.